GLOBAL ECONOMICS AND POLITICS

Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.

Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.

Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.


 

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US DOLLAR AND OTHER MARKETPLACE ADVENTURES © Leo Haviland February 5, 2023

The rap music group Wu-Tang Clan sings in “C.R.E.A.M.”: “Cash, Rules, Everything, Around, Me C.R.E.A.M. Get the money Dollar, dollar bill, y’all.”

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CONCLUSION

Based upon the Federal Reserve Board’s real and nominal Broad Dollar Indices, the United States dollar probably established a major top in autumn 2022. Its subsequent decline intertwined with a fall in the yield in the US 10 year Treasury note, and the dollar depreciation and UST yield decline interrelated with and encouraged notable price climbs in the S+P 500, emerging marketplace stocks, and several other important “search for yield” playgrounds.

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However, for the near term, the Broad Dollar Indices (“BDI”) probably will appreciate some, thereby retracing some of the tumble from their autumn pinnacles. Why?

First, the Federal Reserve recently reemphasized its devotion to its monetary tightening agenda in its battle to return inflation to its two percent objective. This sentinel also has not ruled out further Federal Funds rate increases. It continues to reduce the size of its bloated balance sheet. Moreover, this noble guardian signals an intent to maintain policy rates for quite some time at heights sufficient to bring inflation down to acceptable levels. Unemployment figures remain very low (the Fed stresses “the labor market remains extremely tight”), further suggesting the likelihood that Fed policy will remain moderately hawkish for an extended time. See the 2/1/23 FOMC statement and the Fed Chairman’s Press Conference.

Also, the dollar’s weakness since autumn 2022, and the rally in key global stock marketplaces such as the S+P 500, has not been matched by a sustained rally in commodities “in general”. All else equal, a weaker US dollar tends to boost the nominal price of dollar-denominated assets. Marketplace history is not marketplace destiny. However, despite occasional divergence, over the long run commodities in general have moved in similar time and price patterns with the S+P 500. Yet commodities in recent months, despite occasional rallies, have remained comparatively weak. Even the petroleum complex, despite vigorous OPEC+ efforts to support the price and embargoes on Russia imports, has shown merely intermittent strength; it resumed its slump . This relative feebleness in commodities despite dollar depreciation hints that at least for the near term, the dollar probably will not decline much further in the near term.

In addition, as of January 2023, the real broad Dollar Index (a monthly average) borders important support, April 2020’s 113.4 summit. The nominal BDI (daily data) has retreated around ten percent from its autumn 2022 pinnacle, an important “correction” distance.

Consider recent US rhetoric about the importance of democracy relative to autocracy. For example, see the White House’s “National Security Strategy” (10/12/22). Is that wordplay and related American global policy actions on topics such as the Ukraine/Russia conflict and the Taiwan/China relationship an effort to keep the dollar fairly strong?

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US Dollar and Other Marketplace Adventures (2-5-23)

SUMMERTIME BLUES, MARKETPLACE VIEWS © Leo Haviland August 6, 2022

In “Summertime Blues”, The Who complain:
“Well, I’m gonna raise a fuss
I’m gonna raise a holler
‘Bout workin’ all summer
Just to try to earn a dollar.”

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OVERVIEW AND CONCLUSION

Within and regarding marketplaces and other economic realms, as in other cultural domains, diverse storytellers create and promote competing perspectives, explanations, and forecasts. In this process, the selection and weighing of variables (“facts”, data, evidence, and factors) differs, sometimes considerably. Thus rhetorical crosscurrents and a range of marketplace actions in stocks, interest rates, foreign exchange, and commodities battlegrounds inescapably exist. And since opinions can persist or change, so can significant marketplace trends and relationships, sometimes dramatically.

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In today’s entangled global financial marketplaces, battling viewpoints frequently involve assessments of inflation (especially in consumer price measures) and fears regarding recession (or at least stagflation).

Long run American marketplace history shows that substantially rising United States interest rates in key benchmarks such as the United States Treasury 10 year note leads to bear marketplaces in the S+P 500 and Dow Jones Industrial Average. UST 10 year yields began rising in early March 2020, accelerating upward following 8/4/21’s 1.13 percent trough as American (and worldwide) consumer price inflation became very significant. The S+P 500 peaked 1/4/22 at 4819, plummeting almost 25 percent collapse to its mid-June 2022 low.

A “too strong” US dollar also interrelated with (encouraged) ongoing price weakness in both emerging marketplace equities and dollar-denominated sovereign debt securities (both emerging marketplace equities and debt prices peaked in first quarter 2021). The very strong dollar and price slumps in emerging marketplace securities also helped to undermine the S+P 500. Prices for commodities “in general” climbed substantially after December 2021 (Russia invaded Ukraine 2/24/22), magnifying inflation concerns and levels and thus assisting the price decline in global stock marketplaces. Though commodities peaked in early March 2022, on balance they remained quite high until around mid-June 2022.

As prices tumbled in the S+P 500 and related financial arenas (such as emerging marketplace stocks; corporate bonds and US dollar-denominated emerging market sovereign debt), avid “searches for yield/return” transformed into fearful “runs for cover”. Consumer (Main Street) and small business confidence destruction interrelated with capital destruction (loss of money) by “investors” and other owners) in stock and interest rate securities marketplaces.

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However, during the past few weeks, the S+P 500 has rallied vigorously, about 14.6 percent from 6/17/22’s 3637 to 8/3/22’s 4167. Given the high consumer price inflation pattern as well as concerns about feeble economic growth, what intertwined factors probably played key roles in this S+P 500 ascent?

Within the context of a long run trend for increasing yields, a modest interim yield decline in the UST 10 year can help to spark a notable rally in the S+P 500. Note the timing of the recent yield top in the UST 10 year note, 6/14/22’s 3.50 percent in conjunction with the S+P 500’s 6/17/22 trough at 3637. Also, perhaps the renewed slide in the overall commodities field (especially the petroleum complex) since its June 2022 interim highs allayed the inflationary concerns of some marketplace participants.

Share buybacks, disappearance of substantial stock “overvaluation” in yardsticks such as price/earnings ratios, and ongoing optimism that nominal corporate earnings growth will continue over the long run (perhaps keeping pace with the Consumer Price Index) also helped to motivate an interim bull move in the American stocks. Perhaps short covering in American stocks further inflamed the ascent.

What other interrelated phenomena probably have promoted the S+P 500’s summer rally, especially after the second low on 7/14/22 at 3722? The US dollar’s depreciation since mid-July 2022, although not substantial in percentage terms, arguably has inspired some buyers to venture into American stock playgrounds.

Wall Street and its economic and political allies have long popularized, often as part of American Dream wordplay, the outlook that over the misty long run, American stocks in general (the S+P 500; investment grade equities) will keep rising (at least in nominal terms). Thus the roughly 25 percent slump in the S+P 500 since its majestic January 2022 pinnacle perhaps looked to many “investors” like a good buying opportunity over the misty long run, especially as the UST 10 year yield arguably fell sufficiently from its mid-June 2022 crest to mitigate (at least to some extent) concerns regarding inflation (and Fed rate-raising).

Everyone knows that the American stock marketplace is an investment realm greatly favored by Main Street retail players. Wall Street and Main Street guides and their friends in financial media diligently advise Main Street on the merits (goodness; reasonableness) of investment in United States stocks (especially over the long run) as a means of achieving economic security and wealth.

Institutional players of course play critical roles in US and stock and interest rate securities marketplaces. But retail customers have a very substantial impact on stock price levels and trends. Moreover, in contrast with the situation of several years ago, in regard to the equity securities of key US corporations in general (and many Exchange Traded Funds/ETFs), Main Street over the past few years has benefited from rapid execution (internet) and low (or no) commissions. As the coronavirus pandemic emerged in 2020 and persisted into 2021, apparently many Main Street dwellers ventured into the US stock marketplace (not just large capitalization S+P 500-type firms). Many of these Main Street adventurers (investors, speculators, traders) were new participants in the stock trading game. Also, in an era of significantly rising (and high) consumer prices (note the trend since around mid-2021), probably stocks—like homes—can be an inflation hedge for some devoted financial pilgrims. Besides, speculators and traders, not only investors, seek to identify and profit from “good bargains” in stocks (and other marketplaces).

Many regiments of Main Street inhabitants raced into the exciting cryptocurrency wonderland during the global pandemic (and after the crash in the S+P 500 and Bitcoin to their March 2020 bottoms). Though cryptocurrencies generally have not yet won the honored “investment” badge, some believe cryptocurrencies (or at least some brands of it) are a “good investment” and “worth owning for a while”. In any case, many people have sought to make money by trading cryptocurrencies, usually initiating positions from the buying (long) side.

Despite America’s ferocious cultural wars across numerous economic, political, and social parameters, and despite declining consumer (and small business) confidence and widespread dissatisfaction with the overall direction of the country, American consumers in general (or at least the crucial high-earning and substantial net worth segment, the “haves”, have enjoyed substantial jumps in their nominal (and probably real) net worth in recent years.

The US and global stock marketplaces are far larger than cryptocurrency ones. But picture as well the noteworthy upward flight in recent weeks within another territory favored by some Main Street retail players: Bitcoin. Note the roughly similar timing shifts (trend changes) since first quarter 2020 for Bitcoin and the S+P 500. However, the impressive 40.3 percent upward march in Bitcoin from 6/20/22’s 17579 (another low 7/13/22 at 18892) to its recent high on 8/1/22 at 24658 probably encouraged to some extent the price rallies in the S+P 500 (and some other search for yield marketplaces).

Despite the withering slump in the S+P 500 since its 1/4/22 top and the bloodbath in many cryptocurrencies (Bitcoin peak 11/20/21 at 69000; note interim tops on 12/27/21 at 52100 and 3/28/22 at 48236 occurred alongside highs in the S+P 500), overall US household net worth (and thus nowadays probably still remains quite high. Thus “buying power” remained available from a substantial portion the Main Street (general public).

Some of this Main Street (retail) buying power, even in the face of notable CPI inflation and recession concerns, probably enthusiastically jumped from the sidelines into action in the S+P 500 (and other US equities) and some related playing fields, including Bitcoin, in recent weeks.

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Institutional buying surely assisted the price rallies in the S+P 500 from its June 2022 and July 2022 troughs. But did institutional (Wall Street) money (insight and action) “lead” Main Street players into buying the S+P 500 around then? Probably not in a major way. Note the gloomy economic outlooks of the World Bank and International Monetary Fund released at that time. In addition, see the “dire” pessimism of “259 fund managers responsible for more than $700 billion in investments” [in other words, institutional/Wall Street types] manifested via a survey conducted between 7/8 to 7/15/22 by the Bank of America (cited on 7/19/22 by the NY Times website).

According to that Bank of America monthly review, optimism about global growth staggered to a record low, beneath levels in the immediate aftermath of the 2008 Lehman Brothers collapse. The share of respondents who believed a recession was likely was the highest since April 2020 (as the coronavirus pandemic emerged).

However, these institutional investors apparently were holding the most cash since October 2001, (after the 9/11 attacks), over 20 years ago. Consequently Wall Street (institutional) influence probably decided to put some of that extra cash to work and thus assisted (jumped aboard) the S+P 500’s rally from its June/July 2022 valleys.

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Summertime Blues, Marketplace Views (8-6-22)

MARKETPLACE ROLLING AND TUMBLING: US DOLLAR DEPRECIATION © Leo Haviland June 1, 2021

The rap music group, “Wu-Tang Clan” sings in “C.R.E.A.M.”: “Cash, Rules, Everything, Around, Me C.R.E.A.M. Get the money Dollar, dollar bill y’all.”

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CONCLUSION

The United States dollar commenced a bear trend in spring 2020. Its depreciation probably will continue over the long run.

“Dollar Depreciation and the American Dream” (8/11/20) warned of and analyzed various reasons for a significant depreciation in the real Broad Dollar Index (Federal Reserve Board, H.10) from its lofty April 2020 high at 113.7. These factors generally remain in place. “American Inflation and Interest Rates: Painting Pictures” (5/4/21) stated: “Suppose United States inflation in assorted key indicators such as the Consumer Price Index continues to climb, and that America’s federal budget deficit and debt situation remains very dangerous. Suppose the Federal Reserve remained unwilling to tighten its current highly accommodative policies. Though much depends on other variables, including the economic and political situation in and prospects for other important countries around the globe, this scenario probably will tend to weaken the US dollar.”

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January 2021’s real Broad Dollar Index at 103.3 approached a critical support level, March 2009’s 101.6 peak during the 2007-09 worldwide economic disaster (May 2021’s height is 104.1). A sustained break beneath March 2009’s elevation probably will be important for numerous economic playgrounds. Why? That dollar depreciation likely will occur alongside rising American inflation indicators and the major expansion of American federal indebtedness of recent years (with further national spending extravagance looming). This situation probably will increase pressure on the Fed to significantly reduce (taper) its quantitative easing (money printing) program as well as to boost the Federal Funds rate and thereby US Treasury yields. Climbing UST interest rates accompanied by a tumbling dollar probably will reduce the avid “search for yield/return” in the S+P 500, dollar-denominated debt securities (such as US corporate bonds) and other dollar-priced assets (including many commodities). These developments probably will trigger and sustain slumps in the S+P 500 and “related” asset arenas.

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Marketplace Rolling and Tumbling- US Dollar Depreciation (6-1-21)

GAMESTOP AND GAME SPOTS: MARKETPLACE AND OTHER CULTURAL PLAYGROUNDS © Leo Haviland February 13, 2021

In “The Biggest Game in Town”, A. Alvarez writes: “Mickey Appleman remarked to me that a lot of people don’t fit in where they are, but Las Vegas takes anybody.”

James McManus declares in “Positively Fifth Street”: “Las Vegas…attracts more annual pilgrims than any destination but Mecca.”

OVERVIEW

Wall Street inhabitants and other observers often label Wall Street as a game. Stock, interest rate, currency, and commodity marketplaces likewise are games with assorted players.

GameStop Corporation’s stock trades publicly on the New York Stock Exchange, a respected venue. GameStop’s website, advertisements, and Annual Report include a catchy slogan, “power to the players”. The firm says: “we are a family of preferred destinations for gaming, collectibles and consumer electronics”.

Though GameStop is a significant business enterprise, over the years it generally has not won substantial Main Street attention beyond those following the industry sector to which it belongs. However, GameStop’s recent explosive flight and bloody fall in recent weeks captured front page headlines around the globe. Recall its spring 2020 bottom at less than five dollars per share (2.57 on 4/3/20). From a much higher interim trough at 20.03 on 1/13/21, GameStop marched quickly upward in its bull campaign, more than doubling by its close at 43.03 on 1/21/21. The stock thereafter skyrocketed to 1/28/21’s 483 pinnacle (about 24 times 1/13/21’s depth). On this wild upward ride, a couple of big hedge funds with short positions in GameStop (betting that the GameStop price would slump) apparently got squeezed by a wave of (primarily) Main Street buyers (longs) and had to pay stratospheric prices to escape their short position. Despite the enthusiastic buying spearheaded by the retail (Main Street) crew, not long thereafter GameStop cratered over ninety percent to its subsequent low, at 46.52 on 2/9/21. The pattern of trading in the S+P 500, which reached a new high at 3937 on 2/12/21 in its massive bull charge since 3/23/20’s major bottom at 2192 (though that depressing key trough was close in time to GameStop’s 4/3/20 one), has not closely resembled that of GameStop.

Remarkable (unusual) moves in relatively unknown stocks often attract a modest amount of Wall Street and Main Street (retail) attention. However, the excitement around GameStop’s recent dramatic price action, and especially the related widespread blizzard of wordplay involving GameStop from numerous leading Wall Street stock marketplace wizards, investment and other trading gurus, venerable financial regulators, and sage financial and mainstream media commentators, indicate the relevance of the GameStop phenomenon to other more important cultural matters in economic, finance, and elsewhere.

The extensive passionate interest around GameStop points out that variable’s importance as a factor to consider in connection with overall American (and global) stock marketplace trends and the growing democratization of financial playgrounds. Taking a look at GameStop also offers insight into America’s economic and other cultural divisions and conflicts, the American Dream, and financial rhetoric (including metaphors).

CONCLUSION

Many orations about GameStop’s meteoric stock price rise and its subsequent collapse have involved talk of Main Street (retail; “the little guys”) “versus” Wall Street (typically including institutional “professionals”, “big guns” such as banks, investment banks, and larger money managers and financial (wealth management) advisors.

However, although the large GameStop shorts who got killed were Wall Street pros (insiders), the majority of Wall Street money in stocks (including hedge funds and other money managers) is on the buy (ownership) side. Most institutions (regardless of whether one labels them as an “investor” or some breed of investor, speculator or trader) are net owners of stock who, all else equal and as a guideline, want prices in the S+P 500 (and other stock signposts and individual equities around the world) to rise. So do their banking, investment banking, and financial media allies. Likewise, most of the various communities of Main Street stock owners (typically Wall Street and the media honors these financial pilgrims as “investors”) want stock prices to climb.

Consequently, from the standpoint of stock price action, assuming the existence of a Wall Street versus Main Street battle is erroneous, or at least highly misleading. If retail (investors, traders, speculators) sticks a knife into a few hedge funds (or other institutions) short a stock (or stock sector; index) via encouraging a stock price rise in the given supply/demand situation, that almost surely is not damaging Wall Street institutions as a whole. Despite retail enthusiasm and pride in such a victory, neither Wall Street, capitalism, nor “The Man” suffer much if at all.

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In the stock game, Wall Street loves retail players. Why? Main Street buys and holds stocks. Even when it does not own them for a long time, the majority of Main Street initiates its marketplace position by buying, not selling. Sometimes Main Street is a net seller, but as a rule of thumb it owns equities. It is a truism that all else equal, incremental net buying of equities by Main Street inhabitants will tend to move stock prices upward. That helps Wall Street institutional stock owners to make money from such rising prices. Plus significant retail participation in equity playgrounds provides Wall Street and the corporations they serve with an audience to whom it can sell new issues of stock.

Consider most Wall Street stock recommendations. Doesn’t Wall Street usually advise both professional and Main Street audiences to buy, or at least to hold? How many stock research analysts and advisers (brokers) advise their clients to go short? Of all recommendations, in the array of buy, hold, or sell, what percentage are sell ones? Generally speaking, most Wall Street and Main Street participants in the cultural world of marketplaces, in regard to stocks, applaud upward (bullish) stock price moves and “high” prices as “good”. Conversely, all else equal, most assert that it is “bad” if stocks fall (enter a bear trend) or are “low”.

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In marketplaces, notions of probability and causation reflect opinions. But nevertheless ask a question about Main Street’s role in Wall Street during the past several years, especially since the coronavirus pandemic emerged about a year ago. To what extent has the growing ability of Main Street fortune (financial security, wealth)-seekers to readily access stock marketplaces tended to elevate equity prices? Probably by a great deal. Overall US corporate earnings realities in recent months were feeble; their probable future prospects have not rocketed up to the extent of the S+P 500’s leap. So by propelling stock prices higher, Main Street thereby probably has played a critical role in stretching valuation measures upward significantly relative to what they otherwise would be.

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Wall Street has sold itself to America and the rest of the world as a good (reasonable) place for institutional and Main Street players seeking to make money (receive an acceptable/adequate/good financial return) to put and keep their money. Investment wordplay is a critical aspect of Wall Street sales pitches. Especially in the securities landscape, in stocks and interest rate instruments, Wall Street seeks owners (buyers), and especially it hunts for, honors, and praises “investors” and “investment”. The basic definition of the investment label in Wall Street (and on Main Street) means buying (owning) something. In general Many on Main Street (and Wall Street) have devoted faith that prices for US stocks (“in general”; at least those of investment grade) will continue to rise over the misty long run.

What is one of Wall Street’s greatest fears in regard to Main Street? It is the departure of retail owners of securities (especially stock investors, and particularly stock investors buying and holding for the so-called long run. Hence Wall Street gospels diligently and cleverly promote and solicit stock buying. From Wall Street’s view (not only banks, investment banks and big money managers and financial advisors, but also publicly-held corporations in general), a dramatic reduction of net buying by Main Street of stocks in general (particularly American ones) would be ominous, but an actual sustained substantial run for the exits by retail sects (Main Street becoming a net stock seller) would be dreadful (bad).

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GameStop and Game Spots- Marketplace and Other Cultural Playgrounds (2-13-21)